Lufthansa Airlines

Executive Overview:

Lufthansa is the largest airline in Europe in terms of passengers carried. By 2002, Lufthansa had become of the strongest airlines and top aviations groups in the world. Lufthansa had undergone a decade of fundamental change. Lufthansa was transformed from a state-owned, unprofitable national airline into one of the most profitable, privately owned aviation groups in the industry. The group turned a record loss of €350 million in 1992 into a pre-tax profit of €952 million in 2002. This financial result reflected Lufthansa’s major competitive advantage-its ability to respond rapidly, act flexibly, and withstand crises. Lufthansa proved its unique change management competence when it coped with September 11th, the most serious crisis in the airline industry since World War II. The aviation group pulled ahead of its competitors and reversed a loss of €744 million in 2001 into an operating profit of €718 million in 2002. In 2003, the war in Iraq and the SARS disease demanded that, more than ever before, Lufthansa draw on its ability to cope with crises. Overcoming change-tiredness and continuous re-energizing were seen as the key management challenges in 2003.

Strategic Issues:

How to maintain sustainable success and secure its future as the leader in the airline industry while:

1) Restructuring the organization to increase cost and revenue transparency and to reduce fragmentation

in decision processes.

2) Focusing on continuing strategic cost savings in terms of creating Asian alliances.

3) Combating exhaustion, change-tiredness, or even organizational burnout in an industry that requires

maintaining constant change momentum.

Potential Business Impact:

From autumn 2003, Lufthansa planned to offer its passengers new business class accommodations; it intended to invest around €30million in a program that was to be implemented. The new CEO also calls for a high level of company innovation which will cost additional resources. Assuming a conservative average increase in sales of 20% and a fall through profit rate of 6%, the company looks to lose €5,876 million if the business strategic issues are not resolved.

Assume 20% increase in NSR Y-O-Y

2002 2003 2004 2005 2006 2007 2008 2009 2010 Total 3 Years

% Change in Net Sales Revenue Year Over Year -7.3% 5.8% -3.5% 9.9% 13.0% 20.0% 20.0% 20.0%

Net Sales Revenue 19,073 17,685 18,718 18,065 19,849 22,420 26,904 32,285 38,742

Percent of Net Income that Becomes Fall-Through Profit 118.7% 139.9% -9.7% 17.1% 29.1% 6.0% 1,614 1,937 2,325 5,876

General Environment: Europe (Lufthansa is the largest airline.) (See global segment for international impact.

Demographic Segment:

In 2005, the population of Europe was 728 million or 11% of the world population. It has been growing from 500 million after World War II, peaked in the early 2000s at more than 700 million and has since then begun a decline. Perhaps mirroring its declining population growth, European countries tend to have older populations overall. European countries had nine of the top ten highest median ages in national populations in 2005. Only Japan had an older population. The largest ethnic group in Europe is probably the Russians with some 90 million settling in the European parts of Russia, followed by the Germans (76 million), Italians (58 million), French (49 million), English (45 million), Spanish (42 million), Ukrainians (40 million) and the Poles (38 million).

Opportunities:

1. Opportunity to take advantage of the aging population by offering senior discounts.

2. Ability to hit many different markets in Europe; reach many different customer segments.

Threats:

1. Older and declining populations may have a negative affect on total sales.

2. Several different cultures are being targeted; this could cause problems with implementing business strategies and marketing strategies.

3. Need for a diverse workforce to accommodate diverse customer base.

Economic Segment

The European Union has the largest economy in the world. The EU economy is expected to grow further over the next decade as more countries join the union - especially considering that the new States are usually poorer than the EU average, and hence the expected fast GDP growth will help achieve the dynamic of the united Europe. It is estimated that the Eurozone will grow around 2.6 per cent this year (2006), on a par with other industrialized nations such as the United States at 2.6% (Q2 2006) and 1.6 (Q3 2006).

GDP: $12.82 trillion. (2006) GDP/capita: $18,056. Annual growth of per capita GDP: 2.8% (2006). Income of top 10%: 27.5%. Unemployment 8.8% (2006).

Opportunities:

1. GDP is growing; opportunity to take advantage of that growth.

2. The EU has made doing business across borders easier with standardized currency and regulation.

3. Inflation rates are steady along with currency rates; currency exchange risk will be lower.

Threats:

1. The European economy is not growing as fast as developing nations such as China.

2. The EU has a lot of power over the economy in terms of currency rates and regulations.

Political/Legal Segment

The European Union has evolved over time from a primarily economic union to an increasingly political one. This trend is highlighted by the increasing number of policy areas that fall within EU competence: political power has tended to shift upwards